At ASH MCGINTY, we understand the important role your home plays in your your life. That’s why we are committed to providing you information that will help you make more informed decisions about your home financing.
So, let’s simplify it, starting with interest rate vs. annual percentage rate (APR).
What is an interest rate?
- A fixed-rate mortgage (FRM) [For example, I’m sure you’ve heard of “30 year fixed-rate mortgage“.]
- An adjustable-rate mortgage (ARM)
- A temporary buydown of the interest rate or initial monthly payment.
What is an annual percentage rate (APR)?
You should see both an interest rate and an annual percentage rate (APR) in various documents. The APR, which is usually higher than the interest rate, expresses the cost of the mortgage as an outgoing annual rate and includes certain fees, points, closing costs and other expenses (even though they are paid at application, or before or at closing).
APRs can help you compare types of mortgages and the costs between mortgages or lenders, but remember that the APR is different from the actual interest rate on your mortgage.
I will repeat- The APR is different from the actual interest rate on your mortgage.
How is the interest rate determined?
Catch this- This is why a rate found online may not provide enough information or reflect the interest rate you will actually receive once a lender has assessed your specific circumstances.
Mortgages reflect the conditions in the financial markets.
Complex variables affect the ride and fall of interest rates. This is why we see rates published daily. It’s most important to understand that there is no “one mortgage rate“.
Rates can fluctuate not only daily, but even hourly with movements in the financial markets, and by mortgage type and mortgage amount.
Additionally, the interest rate on your mortgage depends on the risk your mortgage features represent.
When lending money to customers to finance their homes, lenders and their investors take the risk that these customers will not pay back the money loaned to them.
- Lenders typically offer lower mortgage rates on mortgages that present less risk.
- Based on many decades of lending, there are many factors that reduce or increase risk have been identified, including down payment amount, credit score, and other factors.
- Customers with higher credit scores historically default less often (so the lender anticipates less risk) than those with lower credit scores.
- A customer with more money invested in a mortgage with a higher down is considered less risky than a mortgage with a lower down payment.
- Other factors are similarly considered: your debt level in relation to your mortgage amount, whether your home is your primary residence or an investment property, whether it’s a single-family or multi-family home, the mortgage term you need or want, the amount of documentation you provide, etc., etc., etc.
Thing to consider if you decide to “shop rates” among lenders
- A rate that’s not based on the full details of your specific circumstances can only be a guess. Yes Boo, it’s just a guess.
- A guess you obtain today from one lender versus a guess you obtained yesterday or a week ago from another lender offers little (aka zero) basis for an accurate comparison.
- Here’s a simple one– different mortgage types and different mortgage terms have different rates.
- Be sure to understand whether the rate you are quoted is an introductory rate, sometimes called a “teaser rate”, that might rise dramatically a short time after closing.